September 1, 2010
Dear Commissioner Murphy:
Regarding File Number 4-606
I have 17 years of investing experience as a professional covering and investing in healthcare stocks. I have a vast network in this industry so I hope this brief letter provides some value add to your process.
There is an inference from the document that Investment Advisors (IA) are superior to Brokers when it comes to providing honest personalized advice, and while they might be better due to their long run incentives versus the trading fees associated with a broker, there is significant room for improvement for IAs.
The main points I would like you to consider are:
1. IAs also have conflicts that should be disclosed on a frequent basis.
2. IAs tied to Brokerage firms dont necessarily source the best ideas, as they have incentives to keep their clients captive to the Brokerage firms products.
3. Brokerage firms have policies around selling away, which basically prohibit or restrict an IA from making certain outside investment recommendation to a client, even if those investments could be better suited for the client. I see this frequently from IAs I deal with.
4. Layering of fees is an under-disclosed phenomenon (i.e. Merrill Lynch selling a Pimco fund) that is not easily understandable to average investors. For example, when Merrill adds 1%/10% fees to an investment fund on top of the 2%/20% fees paid to the outside manager, the investor is paying 3%/30% which is well above the market average fees of 1.5% 20%. Do investors really understand that?
5. Investment Advisor and Wealth Manager titles are often used interchangeably. Remembering that advisors that cannot sell away from their brokerage firm are not doing the best they can for their investors. I think the term wealth Manager should be limited to use by independent IAs that are not on platforms (ie., ML) . I also think people like to say they have a wealth manager, when in fact the wealth they really create is often biased toward themselves and their firms.
6. There is a difference between independent Investment Advisors (not on a platform) that can select investment opportunities versus an IA from a platform. Your analysis/study should make the impact of this distinction clear (as you compare them to Brokers etc).
Investment advisors should be required to update investors with the fact that while they are investment advisors, they can only recommend investments that are sourced from within their platform.
IAs at brokerage firms should have to make sure investors know the real impact of their layered fees on each investment.
Independent investment advisors (or independent registered investment advisors) that are not tied to these platforms appear to have fewer conflicts than investment advisors tied to platforms. It is important that your study separate these groups for better analysis.
I also recommend taking a random sample of clients invested at brokers/platforms, that also invest in outside investment funds and see if these investors understand the fees they are paying. This could be a most insightful exercise for your panel to conduct.